California

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[97-1 USTC ¶50,261] Keith A. Lawrence, et al., Plaintiffs v. Albertson's, Inc., Eleven Western Builders and Does 1 through 10, inclusive, Defendants Eleven Western Builders, a California Corporation, Cross-Complainant v. Keith A. Lawrence, Keith Alexander Lawrence II, David Allen Rob inson, Kevin Lee Rob inson, Kevin Alexander Lawrence, United States Department of The Treasury, Internal Revenue Service, State of California, Franchise Tax Board and Does 1 through 10, inclusive, Cross-Defendants

U.S. District Court, Cent. Dist. Calif. , CV 95-6465 LGB (SHx), 11/5/96

[Code Sec. 6323 ]

Liens: Priority: Mechanic's liens: Property: Interpleader fund.--Perfected tax liens had priority over a mechanic's lien against an interpleader fund that consisting of money deposited by a company with which the taxpayer had entered into a roofing contract. The taxpayer's right to receive proceeds from the contract was considered a property interest. Since the IRS properly filed notice of the liens under state ( California ) law, it was clearly entitled to the interpleader fund.

[Code Sec. 6323 ]

Liens: Priority: Mechanic's liens: Third parties: Interpleader fund.--Tax liens had priority over third parties' mechanic's liens with respect to an interpleader fund consisting of money deposited by a company with which the delinquent taxpayer had entered into a roofing contract. The tax liens were perfected first in time. Under state ( California ) law, the mechanic's liens related back to the time the claimants began working on the subject property, which occurred after the IRS filed its tax liens in the county recorder's office.

ORDER GRANTING CROSS-DEFENDANT UNITED STATES' MOTION FOR SUMMARY JUDGMENT

Cross-Defendant United States Department of the Treasury--Internal Revenue Service's Motion for summary Judgment came on regularly for hearing on November 4, 1996 . Having reviewed all pertinent papers on file and having considered the oral argument, the Court hereby GRANTS the United States ' Motion for Summary Judgment for the reasons set forth below.

I. PROCEDURAL HISTORY

BAIRD, District Judge:

This case was initiated by Plaintiffs in propria persona and cross-defendants Keith A. Lawrence ("Lawrence" or "taxpayer") and Keith Alexander Lawrence II, David Allen Rob inson, Kevin Lee Rob inson, and Kevin Alexander Lawrence (collectively "Lawrence-related parties"). On April 19, 1995 , Plaintiffs filed an action in the Orange County Municipal Court ("Municipal Court") to Foreclose Works of Improvement Lien, Seize Contractor's Bond and Other Applicable Bonds against defendant Albertson's, Inc. ("Albertson's") and Defendant and Cross-Complainant Eleven Western Builders, a California Corporation ("Eleven Western Builders"). On August 7, 1995, Eleven Western Builders filed in Municipal Court a Cross-Complaint in Interpleader ("Cross-Complaint"), naming as cross-defendants all claimants to certain construction proceeds allegedly owed to Lawrence, including the United States of America (Department of the Treasury--Internal Revenue Service ("IRS")) and the State of California--Franchise Tax Board ("Franchise Tax Board"). On September 18, 1995 , the Franchise Tax Board filed with the Municipal Court a disclaimer of any right or interest to the interpleader fund.

The United States removed the case from the Municipal Court to federal district court, the Hon. Judge Richard A. Gadbois, on September 27, 1995 . On October 6 and 18, 1995, the United States filed its Answer to the Cross-Complaint, asserting its entitlement to the entire amount of the interpleader fund. The United States based its assertion on the unpaid assessed federal income tax liabilities incurred by Keith A. Lawrence and Eleanor J. Lawrence for the 1989, 1991, and 1992 calendar years.

On October 11, 1995 , Eleven Western Builders deposited into the Court's registry the sum of $14,021.47 as the interpleader fund. On January 22, 1996 , the Hon. Judge Richard A. Paez denied Lawrence and the Lawrence-related parties' Motion to Dismiss Cross-Complaint in Interpleader (for lack of subject matter jurisdiction and for failure to state a claim) and the Motion to Strike the United States ' Opposition to the Motion to Dismiss. Additionally, on January 22, 1996 , Judge Paez discharged Eleven Western Builders and Albertson's from the action, conditioned upon Eleven Western Builders depositing an additional $930.28 into the interpleader fund. Eleven Western Builders deposited this additional sum on January 26, 1996 , thereby bringing the total principal amount of the interpleader fund to $14,951.75.

On February 5, 1996 , the case was transferred to the calendar of this Court from the calendar of Judge Gadbois.

On April 10, 1996 , Lawrence and the Lawrence-related parties filed their Answers to the Cross-Complaint in Interpleader ("Answers"). Lawrence and the Lawrence-related parties, in their Complaint and in their Answers, claim that they are entitled to receive assorted amounts of money from the interpleader fund based on mechanic's liens filed for labor, materials and/or equipment these parties furnished for the subject construction project. (See Part II, infra.)

The Court has subject matter jurisdiction pursuant to 28 U.S.C. §1444, which states that any "action brought under section 2410 of this title against the United States in any State court may be removed by the United States to the district Court of the United States for the district and division in which the action is pending." The Cross-Complaint in this case prays for relief in interpleader pursuant to 28 U.S.C. §2410(a)(5).

Presently before the Court is the United States ' Motion for Summary Judgment, filed September 24, 1996 . On October 22, 1996 , Lawrence and the Lawrence-related parties filed a document entitled "Memorandum of Points and Authorities in Support of Affidavit of Keith Alexander, Lawrence," which appears to be an opposing paper. ¹ The United States replied on October 31, 1996 . On November 1, 1996, Lawrence and the Lawrence-related parties filed a document entitled "Affidavit of Keith Alexander, Lawrence of the Criminal Activities Committed Against Him and His Family." ²

II. FACTUAL BACKGROUND

Plaintiff Lawrence has incurred unpaid federal income tax liabilities for the calendar years 1989, 1991, and 1992 (the 1989 and 1991 liabilities are owed jointly by Lawrence and his wife, Eleanor J. Lawrence). The outstanding balances, including interest and penalties through October 25, 1995 , are $11,155.07, $74,580.96, and $45,435.95 respectively. (See Stack Decl. Exs. 3 and 4, attached to United States ' Mot. Summ. J.) The IRS notified Lawrence of the assessments made against him and demanded payment of the assessment amounts. (See id. at "First notice issues" entry.)

On August 3, 1994 , the United States perfected income tax liens in the amount of $68,710.29 against Lawrence and his wife with the San Bernardino County Recorder's Office for the years 1989 and 1991. (See United States ' Answer at Exs. 1 and 2.) On April 17, 1995 , the IRS filed a federal tax lien against Lawrence in the amount of $37,567.00 with the San Bernardino County Recorder's Office in reference to his unpaid assessed income tax liability for the 1992 calendar year. (See Stack Decl. Ex. 6.)

On or about October 5, 1994 , Eleven Western Builders received from the IRS a Notice of Levy with respect to Keith A. and Eleanor J. Lawrence's unpaid tax liabilities. (See Stack Decl. Ex. 2 at 4.)

Lawrence holds a contractor's license issued by the State of California and has a "family roofing business." (Compl. ¶1, attached to Stack Decl. as Ex. 1.) The Lawrence-related parties are Lawrence 's sons, who are also in the roofing business, and provided labor and/or materials for the subject construction project. (See Stack Decl. Ex. 8 at ¶¶7 and 11.) On June 1, 1994 , Lawrence entered into a contract with Eleven Western Builders. (See Stack Decl. Ex. 7.) The subcontract agreement provided for Lawrence to furnish a new roof and repair an existing roof for the general contractor, Eleven Western Builders, on an Albertson's Grocery Store located in Fountain Valley , California ("the Project"), in exchange for the sum of $8,300. (See id.; see also Compl. ¶9.) Lawrence and the Lawrence-related parties commenced work on the Project on or about August 9, 1994 and completed work on or about January 6, 1995 . (See Lawrence Decl. ¶¶3-4, attached to Stack Decl. as Ex. 8; Compl. ¶14.)

After completion of the original work, Lawrence and the Lawrence-related parties were paid $7,470.00 by Eleven Western Builders. In addition, Eleven Western Builders paid Lawrence the sum of $387.75 on or about March 30, 1995 . (See Compl. ¶¶10 and 12.) From October 19, 1994 to January 6, 1995 , Lawrence and the Lawrence-related parties rendered extra work and additional materials, labor and equipment rentals that were not provided for by the terms of the Subcontract Agreement. (Compl. ¶11.) Lawrence and the Lawrence-related parties claim that the reasonable value of all of the additional labor, materials, and equipment is $22,809.50. That total less payments made of $7,857.75 leaves a balance due of $14,951.75. (Compl. ¶12.)

On or about February 7, 1995 , Lawrence sent a letter to Wayne and Rick Backus of Eleven Western Builders, entitled "Notice and Demand," demanding payment of $15,339.50 for the extra labor, materials, and equipment provided for the Project. (Compl. ¶12 and Ex. B attached thereto.) Eleven Western Builders made no payment to Lawrence in response to this letter. On March 10, 1995 , Lawrence and the Lawrence-related parties filed the following Mechanic's Liens with the Orange County Recorder's Office in regard to the property on which the Project is located:

1. Keith A. Lawrence: $15,339.50 for "labor, material, equipment rental, truck rental, for remodeling for Albertson's for roof repairs, built-up roof and new manzart roof." (Compl. Ex. 1 at 10.)

2. Keith A. Lawrence: $2,679.50 for "common law contract labor for remodeling of Albertson's for roof repairs, built-up roof and new manzart roof." ( Id. at 11.)

3. Keith A. Lawrence II: $4,860.00 for "roofing equipment rental, kettle rental, truck rental, propane, fuel for trucks for remodeling of Albertson's roof repairs, built-up roof and new manzart." ( Id. at 12.)

4. Keith A. Lawrence II: $2,400.00 for "common law contract labor for remodeling of Albertson's for roof repairs, built-up roof and new manzart roof." ( Id. at 13.)

5. David Allen Rob inson: $2,400.00 for "common law contract labor for remodeling of Albertson's for roof repairs, built-up roof and new manzart roof." ( Id. at 14.)

6. Kevin Lee Rob inson: $2,400.00 for "common law contract labor for remodeling of Albertson's for roof repairs, built-up roof and new manzart roof." ( Id. at 15.)

7. Kevin Alexander Lawrence: $600.00 for "common law contract labor for remodeling of Albertson's for roof repairs, built-up roof and new manzart roof." ( Id. at 16.)

III. ANALYSIS

A. Standards for Motions for Summary Judgment

1. Federal Rule of Civil Procedure 56

Summary judgment must be entered against a party who, after adequate time for discovery and upon motion, fails to make a showing sufficient to establish an element essential to that party's case, and on which that party would bear the burden of proof at trial. Fed. R. Civ. P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). A party moving for summary judgment may carry its initial burden by pointing out to the district court that there is an absence of a genuine issue of material fact. Celotex, 477 U.S. at 323.

"Once the initial responsibility has been met, the burden shifts to the nonmoving party to oppose the motion by showing specific facts, pursuant to Fed. R. Civ. P. 56(e), which establish a genuine issue for trial." Nilsson, Rob bins, Dalgarn, Berliner, Carson & Wurst v. Louisiana Hydrolec, 854 F.2d 1538, 1544 (9th Cir. 1988). To avoid summary judgment, an adverse party "may not rest upon the mere allegations or denials of the adverse party's pleading." Fed. R. Civ. P. 56(e). The nonmovant must set forth specific facts showing that there remains a genuine issue of material fact for trial. Fed. R. Civ. P. 56(e); Celotex, 477 U.S. at 324.

A dispute about a material fact is genuine if the evidence is such that a reasonable jury could return a verdict for the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). The evidence of the nonmovant is to be believed and all justifiable inferences are to be drawn in favor of the nonmovant. Id. at 255; T.W. Elec. Serv., Inc. v. Pacific Elec. Contractors Ass'n, 809 F.2d 626, 631 (9th Cir. 1987). The determination of whether a given factual dispute requires submission to a jury must be guided by the substantive evidentiary standards that apply to the case. Anderson, 477 U.S. at 255.

On a motion for summary judgment, the district court is "under no obligation to mine the full record for issues of triable fact." Schneider v. TRW, Inc., 938 F.2d 986, 991 n.2 (9th Cir. 1991) (citing Nilsson, 854 F.2d at 1545). "[W]hen a local rule such as United States District Court--Central District of California Rule 7.14.3[ ³] has been promulgated, it serves as adequate notice to nonmoving parties that if a genuine issue exists for trial, they must identify that issue and support it with evidentiary materials, without the assistance of the district court judge." Nilsson, 854 F.2d at 1545. A district court can grant an unopposed motion for summary judgment if the moving papers are sufficient to support the motion and do not reveal a genuine issue of material fact. Henry v. Gill Indus., Inc., 983 F.2d 943, 949-50 (9th Cir. 1993) (upholding granting of unopposed motion for summary judgment on this ground); Griffin v. Allstate Ins. Co., 920 F. Supp. 127, 130 (C.D. Cal. 1996) (citing Henry, 943 F.2d at 949).

If the adverse party does not respond to the motion by showing that there remains a genuine issue of material fact for trial, "summary judgment, if appropriate, shall be entered against the adverse party." Fed. R. Civ. P. 56(e) (emphasis added).

2. Central District of California Local Rules

Under the Local Rules, on a motion for summary judgment, the moving party is required to file a proposed "Statement of Uncontroverted Facts and Conclusions of Law" and the proposed judgment. Local Rule 7.14.1. The statement is to set forth "the material facts as to which the moving party contends there is no genuine issue." Id.

A party opposing a motion must, no later than fourteen days before the date set for hearing of the motion, file either (1) evidence on which the party will rely in opposing the motion and a memorandum of points and authorities in opposition to the motion, or (2) a notice of non-opposition. Local Rule 7.6. "Papers not timely filed by a party including any memoranda or other papers required to be filed under [Local Rule 7] will not be considered and may be deemed by the Court consent to the granting or denial of the motion, as the case may be." Local Rule 7.9.

A party opposing a motion for summary judgment must "file with his opposition papers a separate document containing a concise 'Statement of Genuine Issues', setting forth all material facts as to which it is contended there exists a genuine issue necessary to be litigated." Local Rule 7.14.2. In determining a motion for summary judgment, "the Court will assume that the material facts as claimed and adequately supported by the moving party are admitted to exist without controversy except to the extent that such material facts are (a) included in the 'Statement of Genuine Issues' and (b) controverted by declaration or other written evidence filed in opposition to the motion." Local Rule 7.14.3.

B. Discussion

1. Attachment and Priority of Federal Tax Liens to the Interpleader Fund in Regard to Lawrence

The Internal Revenue Code (the "Code") provides the basis for a discussion of the attachment and priority effect of federal tax liens:

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.

26 U.S.C. §6321 (emphasis added). The Code also provides that:

Unless another date is specifically fixed by law, the lien imposed by section 6321 shall arise at the time the assessment is made and shall continue until the liability for the amount so assessed (or a judgment against the taxpayer arising out of such liability) is satisfied or becomes unenforceable by reason of lapse of time.

26 U.S.C. §6322 (emphasis added). In addition:

The lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary.

26 U.S.C. §6323(a) (West Supp. 1996) (emphasis added). Subsection (f) provides that notice of a lien be filed per the laws of the state in which the property subject to the lien is situated. 26 U.S.C. §6323(f) (West Supp. 1996). California Code of Civil Procedure provides that a tax lien as against the personal property of a natural person is perfected by filing a notice of the lien with the "office of the recorder of the county where the person against whose interest the lien applies resides at the time of the filing of the notice lien." (See Cal. Code Civ. Proc. §2101(c)(4).)

Property rights, as used in the Internal Revenue Code, refers to both real and personal property. "The statutory language 'all property and rights to property,' appearing in section 6321 ... is broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have." United States v. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 719-20 (1985). Therefore, a person's rights under a contract are considered property for purposes of 26 U.S.C. §6321 et seq. Accordingly, a federal tax lien attaches to a taxpayer's rights under a contract, assuming that proper notice has been given. See Seaboard Surety Co. v. United States [62-2 USTC ¶9653], 306 F.2d 855, 859 (9th Cir. 1962) (IRS lien attached to taxpayer's rights pursuant to government construction contract).

A taxpayer's right to receive the proceeds from a contract is still considered property pursuant to 26 U.S.C. §6321 even if the taxpayer's entitlement to those proceeds is conditioned upon performance of the contract. Seaboard Surety [62-2 USTC ¶9653], 306 F.2d at 859; City of Vermillion v. Stan Houston Equipment Co., 341 F. Supp. 707, 713 (D.S.D. 1972).

In the instant case, Lawrence incurred unpaid tax liabilities for the calendar years of 1989, 1991, and 1992. The IRS assessed such liabilities on July 5, 1993 , July 11, 1994 , and April 24, 1995 , respectively. (See Stack Decl. §§3 and 4.) These liens were perfected against Lawrence upon the IRS filing Notices of Federal Tax Liens with the San Bernardino County Recorder's Office on August 3, 1994 , and April 17, 1995 . (See Stack Decl §§5 and 6.) See Cal. Code Civ. P. §2101(c)(4). Moreover, the IRS perfected its interest in the interpleader fund by serving a Notice of Levy in the amount of $72,645.76, with respect to the contract proceeds owed to Lawrence , on Eleven Western Builders on or about October 5, 1994 . The service of such a notice upon Eleven Western Builders, as the entity "holding" the taxpayer's property, "creat[ed] a custodial relationship between the person holding the property and the IRS so that the property comes into the constructive possession of the Government." National Bank of Commerce, 472 U.S. at 720-21.

Lawrence has asserted that he is entitled to proceeds from the contract between himself and Eleven Western Builders. (See Compl. ¶¶12 and 13.) An interpleader fund was established with monies deposited by Eleven Western Builders, who has since been discharged from the action. The current dispute, and the subject of this motion for summary judgment, is entitlement to the interpleader fund. The United States has established that the amount of income tax liabilities, including accruals of interest and penalties through October 25, 1995 are $11,155.07, $74,580.96, and $45,435.95, for the calendar years 1989, 1991, and 1992 respectively. (See United States ' Mot. summ. J. at 15; see also Stack Decl. Exs. 3 and 4.) Thus, Lawrence 's unpaid tax liabilities far exceed the amount of the interpleader fund. Therefore, as the IRS properly perfected its tax liens as against Lawrence, the United States is clearly entitled to the interpleader fund, as it is entitled to Lawrence's property under 26 U.S.C. §6321.

The United States has established that there is no genuine issue of material fact as to the priority of the United States over the taxpayer with respect to the interpleader fund. Thus, the burden then shifts to Lawrence and the Lawrence-related parties to establish that there does exist a genuine issue of material fact.

While it seems that Lawrence and the Lawrence-related parties are attempting to oppose the United States ' motion, they offer no evidence to support their position. It appears that they are challenging the process by which the assessments were made against the taxpayer and whether the liens on Lawrence 's property are valid. (See generally Lawrence Memorandum.) In fact, they state that "[g]enuine issues of material fact existed as to whether the Internal Revenue Service (IRS) procedures were followed in making assessments against taxpayer and whether liens on his property were thus valid, precluding summary judgment in taxpayer's quiet title action." (Lawrence Memorandum ¶4.) Although a taxpayer may not use an interpleader action to attack collaterally the merits of an assessment, the taxpayer may contest-the procedural validity of a tax lien. See Elias v. Connett, 908 F.2d 521, 527 (9th Cir. 1990) (citing United States v. Polk, 822 F.2d 871, 872 n.1 (9th Cir. 1987)). Lawrence and the Lawrence-related parties fail, however, to offer any evidence in support of their challenge.

The United States has fulfilled its burden of establishing that no genuine issue of material fact exists regarding the priority of the United States over Lawrence , as the taxpayer, with respect to the interpleader fund. As Lawrence and the Lawrence-related parties have failed to establish sufficiently that a genuine material fact exists regarding this issue, summary judgment on this particular issue is appropriate pursuant to Rule 56(c).

2. Attachment and Priority of Federal Tax Liens to the Interpleader Fund in Regard to the Lawrence-related Parties

It is well-settled law that while state law determines whether a taxpayer has an interest in property and the extent of that interest, the priority of a competing federal tax lien and a state-created lien is determined by reference to federal law. See Aquilino v. United States [60-2 USTC ¶9538], 363 U.S. 509, 512-14 (1960). Thus, California law must be applied in determining whether the Lawrence-related parties have an interest in the subject property via mechanic's liens. Once that has been determined, federal law will determine the priority of the competing federal tax lien and the state-created mechanic's liens. See generally United States v. [Pioneer] American Ins. Co. [63-2 USTC ¶9532], 374 U.S. 84 (1962) (stating that the priority of a federal tax lien as against a mechanic's lien is a question of federal law).

Except for one mechanic's lien, the United States does not dispute that the Lawrence-related parties acquired property interests in the interpleader fund via mechanic's liens. ⁴ This issue does not need to be discussed, however, because even assuming, arguendo, that all of the mechanic's liens were perfected by the Lawrence-related parties, the United States' federal tax liens still have priority over the interpleader fund via the rule of "first in time, first in right."

The priority of a federal tax lien created by 26 U.S.C. §6321 as against liens created pursuant to state law is governed by the common law rule of "first in time, first in right." United States v. City of New Britain [54-1 USTC ¶9191], 347 U.S. 81, 85 (1954). Thus, the essence of determining priority of the United States ' federal tax liens and the Lawrence-related parties' state-created mechanic's liens is, quite simply, determining which liens were perfected "first."

Title 26 U.S.C. §6323(a) states that a federal tax lien is not entitled to priority over a mechanic's lienor until notice of the tax lien has been filed. In the present case, on August 3, 1994 , the IRS filed a Notice of Federal Tax Lien against the taxpayer in the San Bernardino County Recorder's Office with respect to his unpaid tax liabilities for the 1989 and 1991 calendar years. The unpaid balance due for these tax liabilities incurred by Lawrence greatly exceeds the principal amount in the interpleader fund.

California law provides that a perfected mechanic's lien (i.e., proper notice given, filed within the allotted time period, see Cal. Civ. Code §§3123, 3128, 3129, and 3144.) relates back to the time the claimant began working on the subject property.

Once recorded, the mechanic's lien constitute a direct lien on the improvement and the real property to the extent of the interests of the owner or the person who caused the improvement to be constructed.... The lien is subordinate to recorded encumbrances antedating the commencement of the work of improvement but takes priority over all subsequent encumbrances....

Connolly Development, Inc. v. Superior Court of Merced Cty., 17 Cal. 3d 803, 808, 132 Cal. Rptr. 477, 553 P.2d 637 (1976); see also Owens-Parks Lumber Co. v. McCarthy, 121 Cal. App. 623, 9 P.2d 310 (Cal. Ct. App. 1932) (finding that claim of lien for materials furnished relates back to time claimant began furnishing them). Thus, in the instant case, the Lawrence-related parties' mechanic's liens, assuming that they were all perfected, would relate back to the date upon which the work of improvement was commenced, which was August 9, 1994. (See Stack Decl. Ex. 8 at ¶3.) In other words, the earliest date on which the mechanic's liens of the Lawrence-related parties could have become perfected and attached to the proceeds of the Lawrence-Eleven Western Builders contract was on August 9, 1994, as this is the date upon which Lawrence and the Lawrence-related parties first commenced work on the Project. ⁵

The IRS' federal tax liens were filed against the taxpayer in the San Bernardino County Recorder's Office on August 3, 1994 , and the mechanic's liens of the Lawrence-related parties are assumed for the sake of argument to have been perfected on August 9, 1994 . Thus, the IRS's federal tax liens came "first in time," and so must be considered "first in right." The federal tax liens have priority over the mechanic's liens of the Lawrence-related parties in regard to the interpleader fund.

The evidence submitted by the United States points to the absence of a genuine issue of material fact as to whether the federal tax liens have priority over the mechanic's liens of both Lawrence and the Lawrence-related parties. Neither Lawrence nor the Lawrence-related parties have cited to or provided any evidence to suggest otherwise. As the United States has sufficiently met its burden showing that no genuine issue of material fact exists in regard to the priority of entitlement to the interpleader fund, and the opposing parties have added nothing to controvert it, the Court can properly grant summary judgment pursuant to Rule 56. The Court concludes that the IRS' federal tax liens have priority over the mechanic's liens of both Lawrence and the Lawrence-related parties in regard to the interpleader fund.

IV. CONCLUSION

For the foregoing reasons, the Court hereby GRANTS the United States ' Motion for Summary Judgment and ORDERS that the principal amount of the interpleader fund established by Eleven Western Builders of $14,951.75 be paid to the United States .

IT IS SO ORDERED.

¹ This filing by Lawrence and the Lawrence-related parties is full of irrelevant allegations. Although it cites no evidence to support any of its contentions or allegations and it is not accompanied by a separate statement of disputed facts or conclusions of law, it seems to be an opposition to the United States ' Motion for Summary Judgment. Accordingly, the Court will treat it as an "opposition."

The United States maintains that the "opposition" was not timely and should not be considered. ( United States ' Reply Mot. Summ. J. at 2.) The Court, however, chose to consider the pro per Plaintiffs' filing, but still concludes that summary judgment for the United States is appropriate.

² Despite the fact that this document was submitted on the eve of oral argument for the current motion, the Court has reviewed it. This filing, like the Lawrence Memorandum, makes many irrelevant and unsound assertions. These claims are not appropriate for the Court to consider with regard to the motion at hand. The thrust of this Affidavit seems to be that the IRS and some of its agents have fraudulently issued Notices of Levy/Lien against Lawrence . (See Affidavit ¶13.) Yet Lawrence fails to provide any supporting evidence whatsoever for the numerous allegations made in the Affidavit. In the context of this motion for summary judgment, the Affidavit fails to raise any genuine issue of material fact.

³ Local Rule 7.14.3 provides that:

In determining any motion for summary judgment, the Court will assume that the material facts as claimed and adequately supported by the moving party are admitted to exist without controversy except to the extent that such material facts are (a) included in the "Statement of Genuine Issues" [required of the opposing party by Local Rule 7.14.2] and (b) controverted by declaration or other written evidence filed in opposition to the motion.

⁴ The United States ' motion goes into great detail describing California law regarding acquiring property interests via mechanic's liens. However, the United States does not dispute that the Lawrence-related parties do, in fact, have property interests in the interpleader fund via mechanic's liens. Regardless of whether the one mechanic's lien was perfected, the crux of determining whose lien has priority is a determination of when the liens were perfected. Thus, for purposes of this discussion, it will be assumed, arguendo, that all of the Lawrence-related parties' liens were perfected. The only issue left to determine, then, is the priority of the Lawrence-related parties' liens versus the IRS' federal tax liens.

⁵ The United States brings to the Court's attention that the interpleader fund consists of monies that Lawrence and the Lawrence-related parties claim is owed for extra labor and materials furnished on the Project between October 19, 1994 and January 6, 1995 . (See Compl. ¶¶11-12.) Therefore, regardless of which date is used to determine when the mechanic's liens of the Lawrence-related parties relates back to, the earliest date is August 9, 1994, the date upon which the original work was first commenced.

 

 

[55-2 USTC ¶9667]Ralph N. Highsmith et al., Plaintiffs, v. Max Lair et al., Defendants; Morton D. Goldberg et al., Respondents; United States of America, Appellant

In the Supreme Court of California, Los Angeles , No. 22941. In Bank, 281 P2d 865, 44 A.C. 325, April 15, 1955

Appeal from a judgment of the Superior Court of Los Angeles County .

[1939 Code Sec. 3670--substantially unchanged in 1954 Code Sec. 6321]

Lien for taxes: Rights of government do not extend beyond those of taxpayer: Setoff by judgment creditor.--Defendant Goldberg, a judgment debtor of taxpayer Lair, acquired judgments against taxpayer, without notice of a previously filed tax lien notice against taxpayer. Godberg was allowed to set off his judgments against taxpayer, against the judgment held by taxpayer against Goldberg, notwithstanding the government's claim of an interest in the judgment debt by virtue of its tax lien. State law controls in determining the right of setoff.

Laughlin E. Waters, United States Attorney, and Edward R. McHale, Assistant United States Attorney, for appellant. Maurice Rose for respondents.

[Facts]

EDMONDS , Justice:

The question here presented for decision concerns the scope and effect of notices of tax lien of the United States of America . The appeal is from a judgment [54-2 USTC ¶9602] holding that the federal government may not recover from the judgment debtors of the taxpayer the amount stated in those notices to be due for unpaid taxes, and also that it has no right to money on deposit with the municipal court.

Max Lair sued Morton and Katherine Goldberg for money assertedly due him upon a contract. After the commencement of the action, but before Lair obtained judgment for approximately $4,000, the government filed its notices of tax lien. Subsequently, and before they received actual notice of these liens, the Goldbergs acquired, in the name of H. Markus, four judgments against Lair evidencing a total indebtedness by him of about $4,200.

Levies were made by each of Lair's judgment creditors, or his assignee, upon the indebtedness evidenced by the judgment against the Goldbergs. The State also levied upon this indebtedness claiming that Lair was delinquent in the payment of taxes. The Goldbergs then deposited $4,200 with the marshal of the municipal court to the credit of Markus. This deposit was made under an agreement between the Goldbergs and Markus whereby he was to collect the amount of it from the marshal, less execution fees, and pay the balance to them. In the present action the trial court found that the Goldbergs made this deposit "in order to have the record manifest their set-offs of their acquired four judgments against said judgment in favor of Max Lair." Subsequently, upon the motion of the Goldbergs, Lair's judgment against them was satisfied of record.

The deposit is being held by the marshal pursuant to an order of the court obtained by the plaintiffs in the present suit who are alleged creditors of Lair. The prayer of the complaint was for a money judgment against him, and a declaration of the priorities of liens upon, and conflicting claims to, the indebtedness represented by the judgment obtained by Lair against the Goldbergs.

By cross-complaint, the Goldbergs named the United States of America as a cross-defendant. In its answer, the government asserted that it has first liens on the property of Lair. It asked the court to enforce those liens upon any of Lair's property held by Goldberg and, in particular, upon the deposit with the marshal. By way of cross-complaint against the Goldbergs, the government demanded a personal judgment against them. Only the government has appealed from the judgment which declared, inter alia, that the government never acquired any interest in the debt due from the Goldbergs to Lair, denied it the right to recover any amount against the Goldbergs and ordered that its cross-complaint be dismissed.

[Parties Contentions]

The United States claims that after the notices of tax liens were recorded, it had an interest in the Goldberg's debt to Lair which could not be divested by any act of the debtors. The Goldbergs contend that the United States has no interest in the deposit because the government's liens could only extend to property of Lair. It is their position that the deposit was made to satisfy claims against Lair, and he had no interest in it at any time. They also argue that the government is not entitled to a personal judgment against them because of their right of setoff against Lair and they had no property belonging to him in their possession at the time of the government's demand. Another point relied upon is that, if the court erred in applying the principle of setoff, under the rule of res judicata, the government is bound by the order satisfying the judgment in Lair v. Goldberg. Finally, they insist that no personal judgment can be rendered against them under the provisions of section 3710(b) of the Internal Revenue Code, because, at the time of the government's demand, any property of Lair which they had in their possession had been levied upon by other creditors.

[Relevant Code Provisions]

The Internal Revenue Code provides that if any person liable to pay any tax neglects or refuses to pay the same after demand, the amount, including any interest or penalty, shall be a lien in favor of the United States upon all property and rights to property, belonging to such person. (26 U. S. C., 1946 ed., §3670.) The lien shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been duly filed in the office of the county recorder of the county within which the property subject to the lien is situated. (26 U. S. C., 1940 ed., 1953 Pocket Supp., §3672(a)(1); Cal. Gov. Code, §27330.)

In the event of the nonpayment of the amount of taxes claimed, the collector may levy upon all property and rights to property (with certain exceptions not here pertinent) belonging to such person, or on which the lien provided in section 3670 exists, for the payment of the sum due. (26 U. S. C., 1940 ed., §3692.)

Section 3710 of the Internal Revenue Code reads:

"Any person in possession of property, or rights to property, subject to distraint, upon which a levy has been made, shall, upon demand by the collector or deputy collector making such levy, surrender such property or rights to such collector or deputy, unless such property or right is, at the time of such demand, subject to an attachment or execution under any judicial process.

"Any person who fails or refuses to so surrender any of such property or rights shall be liable in his own person and estate to the United States in a sum equal to the value of the property or rights not so surrendered, but not exceeding the amount of the taxes (including penalties and interest) for the collection of which such levy has been made, together with costs and interest from the date of such levy." (26 U. S. C., 1940 ed., §3710.)

[Government's Rights Same as Taxpayer's]

Although by its liens the government acquired an interest as coowner of the indebtedness of Goldberg to Lair (United States v. City of Greenville, 118 Fed. (2d) 963 [41-1 USTC ¶9381]), its rights are not greater than those of the taxpayer whose property is sought to be levied upon. ( United States v. Winnett, 165 Fed. (2d) 149, 151 [48-1 USTC ¶9115]; accord: Karno-Smith Co. v. Maloney, 112 Fed. (2d) 690, 692 [40-2 USTC ¶9533]; United States v. Graham, 96 Fed. Supp. 318, 321 [51-1 USTC ¶9218].)

`The proposition here laid down is in harmoney with the generally recognized principle that the rights of the garnisher do not rise above, or extend beyond, those of his debtor; that the garnishee shall not, by operation of the proceedings against him, be placed in any worse condition than he would have been in, had the principal debtor's claim been enforced against him directly; that the liability, legal and equitable, of the garnishee to the principal debtor, is a measure of his liability to the attaching creditor, who takes the shoes of the principal debtor, and can assert only the rights of the latter.' . . . It would be most unfair that a third person, merely by reason of his interposition, whether he was a sovereign or not, should be able to change the rights inter sese between the obligor of the chose in action and his obligee, who is the objective of the levy or attachment." ( United States v. Bank of United States , 5 Fed. Supp. 942, 945 [1934 CCH ¶9099].)

[Setoff]

In California , "a judgment debtor who has, by assignment or otherwise, become the owner of a judgment or claim against his judgment creditor, may go into the court in which the judgment against him was rendered and have his judgment offset against the first judgment. . . . Under section 368 of the Code of Civil Procedure the debtor may set off claims against the creditor which were acquired after the assignment of the judgment to a third person but prior to notice to the debtor of the assignment. . . . [T]here is no room for the exercise of discretion upon this question." (Harrison v. Adams, 20 Cal. 2d 646, 649 [128 P. 2d 9]; also see: Haskins v. Jordan, 123 Cal. 157 [55 P. 786].) Actual notice is necessary to defeat this right. (See McCabe v. Grey, 20 Cal. 509.) The rights acquired by the government as coowner of the debt never were greater than those which would have been acquired by an assignee of Lair.

In United States v. Bank of Shelby , 68 Fed. (2d) 538 [4 USTC ¶1226], the government brought an action for penalties against the bank for refusal to surrender $3,500, the amount of the deposit of one Toler, a delinquent taxpayer. The government had assessed Toler for income taxes in March. In June, the Collector served upon the bank a notice of lien for the taxes and a warrant of distress, claiming thereby to have levied on the deposit of Toler. Just prior to the levy, Toler, to meet the claims of creditors, borrowed $10,000 from the bank, giving a mortgage on his plantation.

When Toler was unable to settle with his creditors, he and the bank agreed that, from the proceeds of the loan, he would pay the bank $6,500, the amount due to it upon his past due unsecured notes in its favor. The remaining $3,500 was credited to his account. It was held that the bank had a clear right to offset the $3,500 against the $10,000 note. At the time of the levy, said the court, "there was no property or right to property of Toler which Toler could assert and consequently nothing which the tax could take a lien on or the tax officer could rightfully demand possession of." (P. 539.) The fact that the $10,000 note and the $3,500 deposit both stemmed from the same transaction was discussed, but was not considered to be the controlling factor in the case.

[Notice of Federal Tax Lien]

The government cites United States v. Winnett, 165 Fed. (2d) 149 [48-1 USTC ¶9115], and United States v. Graham, 96 Fed. Supp. 318 [51-1 USTC ¶9218], as supporting its position. In the first case, the court upheld the right of setoff which Winnett obtained prior to the date the lien was claimed. The decision does not bar a right of setoff which is obtained before actual notice of tax lien, but after the lien is recorded. In the Graham case, no consideration was given to the statutes and decisions relating to rights of setoff. In that case, the lien of the federal government was upheld solely upon the basis of its rights against the taxpayer. The right of setoff may not be ignored in determining the effect of tax liens on the claims against a debtor and the state law is controlling in a determination of those rights. (Karno-Smith Co. v. Maloney, 112 Fed. (2d) 690, 692 [40-2 USTC ¶9533].)

The Goldbergs had no notice of the federal government's liens at the time they acquired the judgments against Lair, and those judgments were properly setoff against the one in favor of Lair. Because of those setoffs there is no property in the possession of the Goldbergs against which the tax liens may be foreclosed, and no cause of action against them for a personal judgment. This conclusion makes it unnecessary to discuss other defenses against the claims of the United States .

The judgment is affirmed.

SHENK, J., CARTER, J., SCHAUER, J., and SPENCE, Justices concurred.

TRAYNOR, Justice:

I dissent.

On February 8, 1950 , Lair brought an action against the Goldbergs and on March 26, 1951 , he secured a judgment for $4,114.22. In the meantime, on April 13, 1950 , and July 26, 1950 , the United States filed notices of tax liens against Lair in Los Angeles County . Thereafter the Goldbergs purchased three judgments against Lair and another claim against him that was subsequently reduced to judgment. None of these judgments were entered, however, until after the notices of the tax liens were filed. Had Lair's creditors sought to enforce their claims against Lair instead of selling them to the Goldbergs, they could not have reached Lair's claim against the Goldbergs until the tax liens had been satisfied. ( United States v. Security Trust & Sav. Bank, 340 U. S. 47, 50-51 [71 S. Ct. 111, 95 L. Ed. 53 [50-2 USTC ¶9492]]; United States v. Acri, 348 U. S. 211 [75 S. Ct. 239; 99 L. Ed. ^* -- [55-1 USTC ¶9138]]; United States v. Liverpool & London & Globe Ins. Co., 348 U. S. 215 [75 S. Ct. 247, 99 L. Ed. ^>k -- [55-1 USTC ¶9136]].) In such case, the United States would have been free to enforce its liens against Lair's property by collecting the judgment in his favor against the Goldbergs. The question presented, therefore, is whether the Goldbergs can defeat this right of the United States by purchasing claims against Lair that but for the purchase would be subordinate to the tax liens. In my opinion, they cannot do so.

It is true that the Goldbergs did not have actual knowledge of the tax liens at the time they purchased the claims against Lair and that in the absence of federal legislation their right to setoff would not be prejudiced by an assignment without notice of the judgment against them. (Harrison v. Adams, 20 Cal. 2d 646, 649 [128 P. 2d 9]; Code Civ. Proc., §368.) It bears emphasis, however, that the Goldbergs did not pay their judgment creditor without notice of the tax liens against him. Instead, they purchased claims against their creditor that were subordinate, whether they knew it or not, to the tax liens, and there is no reason why these claims should have greater value against the United States in the Goldbergs' hands than they had in the hands of the Goldbergs' assignors.

Citing Karno-Smith Co. v. Maloney, 112 Fed. (2d) 690 [40-2 USTC ¶9533], United States v. Winnett, 165 Fed. (2d) 149 [48-1 USTC ¶9115], United States v. Bank of Shelby , 68 Fed. (2d) 538 [4 USTC ¶1226], United States v. Graham, 96 Fed. Supp. 318 [51-1 USTC ¶9218], and United States v. Bank of United States , 5 Fed. Supp. 942 [1934 CCH ¶9099], the majority opinion holds, however, that the right to setoff must be determined by state law and that the Goldbergs may not be placed in a worse position toward their creditor because the United States has intervened. The cited cases considered situations in which the right to setoff arose before the tax liens were perfected or in which the delinquent taxpayer at no time held an enforcible claim against his alleged debtor. It is settled, however, that once the tax lien has been perfected it may not be displaced by operation of state law (Michigan v. United States, 317 U. S. 338, 340 [63 S. Ct. 302, 87 L. Ed. 312]; United States v. City of New Britain, 347 U. S. 81, 84 [74 S. Ct. 367, 98 L. Ed. 520 [54-1 USTC ¶9191]]; United States v. Snyder, 149 U. S. 210, 214 [13 S. Ct. 846, 37 L. Ed. 705]) and that the interests of the United States may not be prejudiced by the assertion of subsequently acquired rights of third parties against the tax delinquent. ( United States v. Security Trust & Sav. Bank, 340 U. S. 47, 50-53 [71 S. Ct. 111, 95 L. Ed. 53 [50-2 USTC ¶9492]]; Glass City Bank v. United States, 326 U. S. 265, 267-268 [66 S. Ct. 108, 90 L. Ed. 56 [45-2 USTC ¶9449]]; United States v. City of Greenville , 118 Fed. (2d) 963, 965 [41-1 USTC ¶9381]; Miller v. Bank of America, 166 Fed. (2d) 415, 417 [48-1 USTC ¶9185]; Citizens State Bank of Barstow v. Vidal, 114 Fed. (2d) 380, 383-384 [40-2 USTC ¶9603]; In re Dartmont Coal Co., 46 Fed. (2d) 455, 457; United States v. Graham, 96 Fed. Supp. 318, 321 [51-1 USTC ¶9218], affirmed, 195 Fed. (2d) 530 [52-2 USTC ¶9425]; United States v. Rosenfield, 26 Fed. Supp. 433, 436 [39-1 USTC ¶9204].)

The fact that the Goldbergs did not have actual knowledge of the tax liens when they purchased the claims against Lair does not render the enforcement of the tax liens against them inequitable. The Goldbergs' indebtedness to Lair was an asset that the United States was entitled to levy upon for the payment of taxes due. As noted above, the Goldbergs did not pay the judgment in ignorance of the tax liens but instead purchased claims against Lair. That the value of these claims was problematical was apparent from the fact that Lair's creditors were willing to sell them for approximately one third of their face value and the Goldbergs could easily have determined from an examination of the records that they were subordinate to the tax liens. Under these circumstances it cannot reasonably be said that the United States attempted to prejudice the Goldbergs' position toward their creditor by asserting its tax liens. Instead, because they failed to investigate the sources of information available to them, the Goldbergs have been permitted to succeed in defeating the enforcement of the tax liens by advancing claims that were subordinate to them.

GIBSON, Chief Justice, concurred.

^* Adv. Opn.: Page 193.

^_k Adv. Opn.: Page 195.

 

 

[75-2 USTC ¶9636]American Fidelity Fire Insurance Co., a corporation, Plaintiff v. United States of America, etc., et al., Defendants The People of the State of California, etc., Cross-Complainant v. American Fidelity Fire Insurance Co., a corporation, et al., Cross-Defendants

U. S. District Court, No. Dist. Calif. , No. 71 911 WTS, 385 FSupp 1075, 11/19/74

[Code Sec. 6323]

Lien for taxes: Priority: Surety's interest.--Federal tax liens were found to have priority over the interest of the Insurance Company (Surety) in funds owed to the taxpayer. Surety, according to state law, could be subrogated only to such rights as the creditors has against the taxpayer. The court found that no stop notices were filed with respect to mony already paid the government or with respect to funds that had been interpleaded. The court did find that the agreement between the taxpayer and surety established a security interest but the interest was not perfected by the filing of a financing satement and thus it was subordinated to the tax ilens.

Adams & Ernst, 220 Montgomery St. , San Francisco , Calif. , for plaintiff. King & Mering, 901 H St., Sacramento, Calif., Williams, Van Hoesen & Brigham, 360 Pine, San Francisco, Calif., Rosenberg, Wiseman & Sweet, 5840 Geary Blvd., San Francisco, Calif., for defendants and cross-complainants.

Memorandum of Decision

SWEIGERT, District Judge:

This action is brought by American Fidelity Fire Insurance Company ("Surety") against the United States , State of California ("State"), and other defendants seeking a judicial determination that it is entitled to certain monies due from the State of California to one Turner under a public works contract for the cleaning and painting of a state highway bridge. The State, answering, has interpleaded the unpaid contract balance of $3,427.28.

The case is presently before the Court on plaintiff Surety's, defendant United States ', and defendant State 's cross-motions for summary judgment. The sole remaining issue is whom as between plaintiff, in its capacity as surety, and defendant United States, pursuant to three federal tax liens, has the superior right to the interplead funds.

Facts

According to the evidentiary record herein, consisting of an Agreed Statement of Facts (filed July 9, 1973 ), the facts are as follows:

On June 29, 1970, the Department of Public Works of the State of California entered into a contract with Boyd M. Turner, individually and doing business as Able Painting Contractors, for the cleaning and painting of a state highway bridge for a total contract price of $36,600. Plaintiff surety posted a performance bond and a labor and materialmen's bond with respect to this contract. On October 20, 1970 , the date of satisfactory completion of the contract, the sum of $7,099.68 remained due Turner under the contract.

[Stop Notices Filed]

On October 28, 1970 , the Andrew Brown Company filed a stop notice with the State in the amount of $2,741.82 for materials allegedly supplied to Turner but no action was ever commenced to perfect that claim. On October 30, 1970 , another stop notice was filed by one Hardwick, doing business as Crest